SEC Proposes New Asset Custody Rules Targeting Crypto Firms

Jimmy Aki
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As part of its continued crackdown on the cryptocurrency sector, the Securities and Exchange Commission (SEC) has proposed rules that would make it more difficult for crypto firms to custody assets.

Exchanges Need to Register 

SEC Chairman Gary Gensler issued a statement on Wednesday confirming that the agency had voted in favor of a new set of rules that tightens restrictions on crypto firms’ custodial abilities. The proposal, which has yet to be officially approved by the securities watchdog, essentially recommends changes to the “2009 Custody Rule,” which will apply to all assets, including cryptocurrencies.

In his statement, Gensler explained that many firms in the crypto industry that custody cryptocurrencies are yet to qualify as asset custodians. The SEC’s guidelines note that a qualified custodian should first be a federal or state-chartered bank or savings association, a trust company, a registered broker-dealer, a futures commission merchant, or a foreign financial entity. 

However, under the newly proposed rules, companies seeking to become registered custodians must also ensure that all assets being custodied are well separated. The rules also recommend that all prospective asset custodians meet additional audit and transparency requirements, ensuring that the SEC and other financial regulators thoroughly understand their operations.

Gensler was especially targeting cryptocurrencies. He specifically claimed in his speech that while many crypto exchanges and trading firms maintain custody of their customers’ assets, they do not qualify as asset custodians.

The regulatory chief also stated that exchanges tend to merge their customers’ funds – a dig at FTX, the now-defunct exchange that went bankrupt after combining its customers’ funds with its own and incurring significant losses.

The SEC Chair also stated that investors could not currently trust crypto companies, which should change with the proposed rules.

Another Anti-Crypto Campaign

While the SEC has claimed that its new rules will help improve investor protection, it is also easy to see how this is the next step in its seemingly never-ending pursuit of crypto companies. The financial regulator has been relentless recently, targeting companies for what it believes to be unregistered securities listings and unlicensed product offerings. 

The latest victim of the regulator’s campaign appears to be none other than Binance – the world’s largest crypto exchange. Earlier this week, the Wall Street Journal reported that the exchange has been working with the agency to remedy compliance issues and conclude several of the latter’s investigations. 

Citing a statement from Binance strategy chief Patrick Hillmann, the news source explained that the exchange is already preparing its checkbook in anticipation of a fine. In addition, Hillman pointed out that the penalties for some of these previous compliance violations could be more than fines. For now, it’s left for the SEC to decide. 

In the past week, the SEC had also taken action against Binance’s partner Paxos Trust Ltd., alleging that both companies violated securities laws when they listed Binance USD (BUSD), the exchange’s native stablecoin. Now, it’s almost a question of who the agency will target next. 

The new proposed rules are yet to be finalized, and some SEC members disapprove of them. Hester M. Pierce, a commissioner at the agency with a track record for being pro-crypto, shared her disdain for them. 

In a statement published following Gensler’s, Pierce pointed out that these rules appear targeted at the crypto industry and designed to take it down. She added that the proposal would do more harm than good, as the measures would only force investors to withdraw their assets from exchanges that already have adequate safeguards in place to prevent fraud.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.